Freehold Friendly (FHOA) Lease

To date, Canadian freehold owners who wished to have their resources developed have had no effective choice other than to lease their mineral rights to oil and gas companies under freehold lease agreements drafted by oil and gas company lawyers for purposes of protecting their industry clients.

The ‘Freehold Friendly (FHOA) Lease’ drafted by FHOA in 2005 was designed to address issues of concern with the form of lease agreement used by western Canadian land agents in leasing individually owned freehold mineral rights. CAPL (Canadian Association of Petroleum Landmen) leases were first introduced in 1988 and, in the intervening years, virtually all leasing of individually owned freehold mineral rights has been done on CAPL or modified CAPL lease forms. FHOA considers many aspects of CAPL leases to be unfair to individual freeholders particularly when the terms of CAPL leases are compared to the terms in Crown leases or freehold leases prescribed by the large energy companies who own freehold mineral rights (see “Other Industry Lease Forms”). The intent of the FHOA lease was to more fairly balance the rights of the owner of the resource with the rights of the energy company developing the resource.

In the early 1980's, the Office of the Farmers’ Advocate of Alberta drafted a lease agreement for freeholders. The industry stonewalled and very few freehold owners succeeded in leasing their mineral rights under the Farmers’ Advocate lease form. In order to avoid a similar fate for the FHOA lease, a number of FHOA’s directors organized Just Freehold Energy Corporation (“JFEC”). Just Freehold is a for-profit energy company formed for the specific purpose of developing freehold mineral rights in a just manner and leading the energy industry by example in treating freeholders fairly (click here to visit JFEC’s website). FHOA entered into a relationship agreement with JFEC under terms of which Just Freehold committed to using the FHOA lease in all of its dealings with freehold owners (see “The FHOA/JFEC Relationship Agreement”).

Energy companies have always found it much simpler to deal with Crown mineral rights than with individually owned freehold mineral rights. With Crown mineral rights, a single knowledgeable entity (the provincial government) prescribes a non-negotiable Crown lease form and maintains a staff of experts to interface with industry operators in the ongoing administration of Crown leases. With individually owned freehold, the energy company is typically faced with protracted lease negotiations with multiple owners of a single tract of mineral rights frequently followed by ongoing queries from freehold owners who seldom have the expertise required to understand oil or gas industry operations. Historically, the greater simplicity in dealing with the Crown has been offset by the higher royalty rates prescribed by the Crown. However, since 2005, changes in Crown royalty rates, the introduction of Crown royalty holidays and persistently low natural gas prices have significantly unbalanced the Crown/freehold playing field (see “Crown Leases”, “The Uneven Playing Field”).

Crown leases currently provide for royalty holidays (up to three years with royalties as low as 2 ½ or 5%) followed by sliding scale royalties tied to oil and gas prices and well productivity (see “Crown Royalties”). Except in areas where freehold mineral rights are potentially oil prone, the fixed 16-18% royalty rates in most existing freehold leases or freeholder’s expectations for such rates in new leases has had the effect of severely curtailing the energy industry’s interest in developing freehold mineral rights. In situations where development is proceeding on adjacent Crown mineral rights serious drainage issues may arise.

To address the unbalanced Crown/freehold playing field and a number of other leasing issues which have materialized since 2005, FHOA has modified the Freehold Friendly (FHOA) Lease (see “Detailed Summary”, “FHOA Lease v. CAPL Leases”).

The FHOA lease may be purchased from the association by any member in good standing for the sum of twenty-five dollars ($25.00).